When you open an individual retirement account, you naturally run the numbers relative to the rate of return on your investments and the effect of compounding. The hope is that your funds will grow at a high rate each year, allowing you to retire in fabulous style when the time comes. However, market performance varies, economies stagnate, and jobs can even be lost. Still, you can take regular steps to maximize IRA growth.
Contribute the maximum every year. The Internal Revenue Service allows you to put $5,000 each year into an IRA. Once you reach age 50, you can add $6,000 per year. Contributions cease at age 70 1/2 for traditional IRA owners, but Roth owners can keep adding money until they die. Consistency is key.Step 2
Go for growth investments. Higher growth is often accompanied by higher risk, but look for growth-oriented stocks. mutual funds and ETFs for your IRA. You can also invest in less traditional areas, such as precious metals, timber, REIT (real estate investment trust) or emerging-market securities.Step 3
Reallocate as time goes on. When you are in your 20s and 30s, going after growth aggressively is fine. If your holdings tank, you'll have time to recover before retirement. However, in your 40s and 50s, your objective shifts to protecting what you have. Thus, if your IRA holds 80 percent growth stocks in your 20s, by the time you are 50, you might want to allocate just 50 percent of your IRA holdings to growth. Less risky instruments such as bonds and Treasury securities might account for the remaining 50 percent. The closer you get to retirement, the less you should have invested in high-risk securities.
- If you have a Roth IRA and plan to pass it on to your heirs, you might feel comfortable maintaining an aggressive growth strategy throughout your lifetime. Leaving the Roth to your spouse allows her to incorporate it into her own IRA. It would be up to her to then reallocate to reduce risk as she approaches retirement or death.
Video of the Day
- cash image by Alexey Klementiev from Fotolia.com